FIN 300 TEST QUESTIONS WITH
REVIED CORRECT DETAILED
ANSWERS
A bank is negotiating a loan. The loan can either be paid off as a lump sum of $110000
at the end of five years, or as equal annual payments at the end of each of the next five
years. If the interest rate on the loan is 6%, what annual payments should be made so
that both forms of payment are equivalent? - Answer- N= 5; I/Y =6; PV=0; FV =
110,000; CPT PMT = $19,513.6 or $19,514
An annuity pays $47 per year for 12 years. What is the future value (FV) of this annuity
at the end of those 12 years, given that the discount rate is 4%? - Answer- N=12; I/Y =4;
PV=0; PMT =47; CPT FV = $706.21
Consider the following timeline detailing a stream of cash flows:
1-$100, 2-$100, 3-$200, 4-$200
If the current market rate of interest is 6%, then the present value (PV) of this stream of
cash flows is closest to: - Answer- CF0=0; C01 = 100; C02 =100; C03= 200; C04 =200;
I=6; CPT NPV = $509.68 or $510
Consider the following timeline detailing a stream of cash flows:
1-$5000, 2-$6000, 3-$7000, 4-$8000
If the current market rate of interest is 10%, then the present value (PV) of this stream
of cash flows is closest to: - Answer- CF0=0; C01 = 5000; C02 =6000; C03= 7000; C04
=8000;
I=10; CPT NPV = $20,227
An 11% APR with semiannually compounding is closest to which of the following? -
Answer- EAR = (1 + APR/n) n -1 = (1 + 0.11/2)2 - 1 = 0.1103 or 11.03%
If the current inflation rate is 1.9%, then the nominal rate necessary for you to earn an
9% real interest rate on your investment is closest to: - Answer- (1+ Nominal Rate) =
(1+ Real Rate)*(1+Inflation)
The effective annual rate (EAR) for a savings account with a stated APR of 8%
compounded daily is closest to: - Answer- EAR = (1 + APR/n) n -1 = (1 + 0.08/365)365 -
1 = (1.0022)365 - 1 = 1.08328 -1 = 0.08328*100 or 8.33%
, A graphic designer needs a laptop for audio/video editing, and notices that they can
elect to pay $3100 for a Dell XPS laptop, or lease from the manufacturer for monthly
payments of $77 each for four years. The designer can borrow at an interest rate of %
APR compounded monthly. What is the cost of leasing the laptop over buying it
outright? - Answer- Monthly APR = 6%/12 = 0.5%
N= 12*4 =48; I/Y =0.5; PMT = 77; FV =0; CPT PV = $3278.6 or $3279
Leasing for the laptop would cost ($3279 - $3100) $179 more than buying
A homeowner has five years of monthly payments of $1300 before she has paid off her
house. If the interest rate is 4% APR, what is the remaining balance on her loan? -
Answer- Monthly APR = 4%/12 = 0.33333%
N = 5*12 =60 months; I/Y = 0.33333; PMT =1300; FV =0 (no balance left after loan paid
off); CPT PV = $70,588.86 or $70,589
How are investors in zero−coupon bonds compensated for making such an investment?
- Answer- Such bonds are purchased at a discount, below their face value.
Bonds with a high risk of default generally offer high yields - Answer- True
Your company wants to raise $9.5 million by issuing 10-year zero-coupon bonds. If the
yield to maturity on the bonds will be 5% (annual compounded APR), what total face
value amount of bonds must you issue? - Answer- $15,474,498.96
FV=PV x (1+r)^n
Suppose a ten-year, $1,000 bond with an 8.5% coupon rate and semiannual coupons is
trading for $1,035.19.
a. What is the bond's yield to maturity (expressed as an APR with semiannual
compounding)?
b. If the bond's yield to maturity changes to 9.7% APR, what will be the bond's price? -
Answer- The bond's yield to maturity is
7.98%.
The new price for the bond is
$924.27.
Your company currently has $1,000 par, 6.75%
coupon bonds with 10 years to maturity and a price of $1,065. If you want to issue new
10-year coupon bonds at par, what coupon rate do you need to set? Assume that for
both bonds, the next coupon payment is due in exactly six months. - Answer- 5.88%
Which of the following statements is true of bond prices? - Answer- A rise in interest
rates causes bond prices to fall.
Why are the interest rates of U.S. Treasury securities less than the interest rates of
equivalent corporate bonds? - Answer- U.S. Treasury securities are widely regarded to
be
risk−free.
REVIED CORRECT DETAILED
ANSWERS
A bank is negotiating a loan. The loan can either be paid off as a lump sum of $110000
at the end of five years, or as equal annual payments at the end of each of the next five
years. If the interest rate on the loan is 6%, what annual payments should be made so
that both forms of payment are equivalent? - Answer- N= 5; I/Y =6; PV=0; FV =
110,000; CPT PMT = $19,513.6 or $19,514
An annuity pays $47 per year for 12 years. What is the future value (FV) of this annuity
at the end of those 12 years, given that the discount rate is 4%? - Answer- N=12; I/Y =4;
PV=0; PMT =47; CPT FV = $706.21
Consider the following timeline detailing a stream of cash flows:
1-$100, 2-$100, 3-$200, 4-$200
If the current market rate of interest is 6%, then the present value (PV) of this stream of
cash flows is closest to: - Answer- CF0=0; C01 = 100; C02 =100; C03= 200; C04 =200;
I=6; CPT NPV = $509.68 or $510
Consider the following timeline detailing a stream of cash flows:
1-$5000, 2-$6000, 3-$7000, 4-$8000
If the current market rate of interest is 10%, then the present value (PV) of this stream
of cash flows is closest to: - Answer- CF0=0; C01 = 5000; C02 =6000; C03= 7000; C04
=8000;
I=10; CPT NPV = $20,227
An 11% APR with semiannually compounding is closest to which of the following? -
Answer- EAR = (1 + APR/n) n -1 = (1 + 0.11/2)2 - 1 = 0.1103 or 11.03%
If the current inflation rate is 1.9%, then the nominal rate necessary for you to earn an
9% real interest rate on your investment is closest to: - Answer- (1+ Nominal Rate) =
(1+ Real Rate)*(1+Inflation)
The effective annual rate (EAR) for a savings account with a stated APR of 8%
compounded daily is closest to: - Answer- EAR = (1 + APR/n) n -1 = (1 + 0.08/365)365 -
1 = (1.0022)365 - 1 = 1.08328 -1 = 0.08328*100 or 8.33%
, A graphic designer needs a laptop for audio/video editing, and notices that they can
elect to pay $3100 for a Dell XPS laptop, or lease from the manufacturer for monthly
payments of $77 each for four years. The designer can borrow at an interest rate of %
APR compounded monthly. What is the cost of leasing the laptop over buying it
outright? - Answer- Monthly APR = 6%/12 = 0.5%
N= 12*4 =48; I/Y =0.5; PMT = 77; FV =0; CPT PV = $3278.6 or $3279
Leasing for the laptop would cost ($3279 - $3100) $179 more than buying
A homeowner has five years of monthly payments of $1300 before she has paid off her
house. If the interest rate is 4% APR, what is the remaining balance on her loan? -
Answer- Monthly APR = 4%/12 = 0.33333%
N = 5*12 =60 months; I/Y = 0.33333; PMT =1300; FV =0 (no balance left after loan paid
off); CPT PV = $70,588.86 or $70,589
How are investors in zero−coupon bonds compensated for making such an investment?
- Answer- Such bonds are purchased at a discount, below their face value.
Bonds with a high risk of default generally offer high yields - Answer- True
Your company wants to raise $9.5 million by issuing 10-year zero-coupon bonds. If the
yield to maturity on the bonds will be 5% (annual compounded APR), what total face
value amount of bonds must you issue? - Answer- $15,474,498.96
FV=PV x (1+r)^n
Suppose a ten-year, $1,000 bond with an 8.5% coupon rate and semiannual coupons is
trading for $1,035.19.
a. What is the bond's yield to maturity (expressed as an APR with semiannual
compounding)?
b. If the bond's yield to maturity changes to 9.7% APR, what will be the bond's price? -
Answer- The bond's yield to maturity is
7.98%.
The new price for the bond is
$924.27.
Your company currently has $1,000 par, 6.75%
coupon bonds with 10 years to maturity and a price of $1,065. If you want to issue new
10-year coupon bonds at par, what coupon rate do you need to set? Assume that for
both bonds, the next coupon payment is due in exactly six months. - Answer- 5.88%
Which of the following statements is true of bond prices? - Answer- A rise in interest
rates causes bond prices to fall.
Why are the interest rates of U.S. Treasury securities less than the interest rates of
equivalent corporate bonds? - Answer- U.S. Treasury securities are widely regarded to
be
risk−free.
